We've seen losses in individual industries.
How could we calculate losses for the entire economy?
Well, again this depends on what kind of an agreement the UK reaches with the EU.
Whether they have a very intense integration agreement
like maybe Norway does or Switzerland with the EU,
which requires them to pay into the budget,
obey the rules, have no impact on the rules,
but have a large amount of trade with the European Union.
They would also have to permit some free movement of people.
So, if they had that arrangement,
this would be sort of an optimistic scenario,
the losses should be less.
If they go drastic,
where they go to just maybe a free trade arrangement like Canada has with the EU,
where only goods are involved.
There's no movement of people.
There's no paying into the EU budget,
no obeying EU rules,
then the losses would be much greater.
So, it depends how these negotiations play themselves
out and where Britain ends up as a result.
But initially, they were doomsday predictions that Brexit would
have a tremendously negative impact on the UK economy and has not yet.
The UK has not gone into recession.
We do have to remember though that it is still in the EU.
The pound has fallen and therefore,
the UK is exporting more than it ever has to the EU.
So, they're actually in a really nice situation right now as
the negotiations proceed and we wait for the final outcome.
But it is unlikely that they're going to be able to have
as much trade as a percent of their GDP as they had before,
just because the bears will be greater,
because the idea initially that they would make up for EU trade
by agreements with former colonies is not very practical,
because distance matters and many former British colonies are a long ways away.
We have to remember that the loss of the City of London would be a great blow to the UK
and it's still not clear what's going to happen to the City of London.
But there are lots of
other intangibles like if the freedom of movement of labor is restricted,
if the City of London disappears as a financial center becomes much smaller.
High skilled immigration to the UK will be reduced
either because they closed the door or because the jobs available are less attractive,
or the income is lower with a weaker pound.
So, all of these things deprive the UK of sources of growth, of income,
of value added, that will be felt over time,
little by little, maybe marginally year by year.
The result is going to be a smaller Britain.
Let's have a look at some of the estimates that different groups
have given us on what will happen to exports,
to GDP, to incomes as a consequence of Brexit.
The first slide shows what is expected to happen to British exports.
Now, remember that exports are part of the GDP equation.
So, less exports means less GDP and less income.
So, some forecasts are for a considerable decline in export growth.
If we look at this by sector,
we mentioned the automotive sector and you can see it on this graph.
It's not the one that would suffer the most.
There's also machinery and equipment,
there's the chemical sector which is huge,
and there's energy and a number of other sectors that we'd see
their export growth suffer more or less under different scenarios.
Where would the UK lose more exports,
to what regions, or to what countries?
Well, Germany is the one that takes most UK exports now followed by the Netherlands.
So, both of those would be effected strongly
under Brexit and exports to other EU countries as well.
So, if we add all of this up,
what happens to the GDP of the UK,
which is our underlying measurement of prosperity,
of well-being if you will.
This graph shows three different years into the future and showing how much real GDP,
GDP minus inflation, would be reduced in the UK as a result of Brexit.
Of course, again, it depends on what scenario you are assuming,
are they going to have a really close trade agreement with the EU?
Will the EU allow that?
Will the British accept that?
Or are they going to have a distant relationship like we mentioned,
maybe a free trade area like Canada.
Well, depending on those scenarios,
GDP would shrink more or less, right?
Of course, that then affects household income.
So, here you see three different scenarios,
assuming different outcomes of the talks and you see the reduction
in household income in the UK as a result of leaving the EU.
It's very substantial in the most pessimistic scenario.
But even the optimistic scenario,
households will have less income.
The UK government has estimates of how much it
expects GDP and household incomes and wages to be affected by Brexit.
We have to remember again that if the pound weakens,
inflation is likely to rise in the UK.
So, these estimates include
higher inflation and the lower growth that we've been talking about.
So, as you look at the different scenarios and
the different sources and the different metrics,
you can see that the losses will be substantial on the left hand part of this slide.
On the right hand part of the slide,
we see something that's quite ironic.
There was a lot of fake news in
the Brexit campaign as we've seen in other countries and other campaigns recently.
One of the claims of the Brexiters was that the country would save
more than £300 million a week by leaving the EU
because the UK does pay more into the EU budget than it receives,
as we've mentioned, and it pays into different EU programs.
Well, the irony of all of it is,
since the UK has passed from one of the fastest growing to one of
the slowest countries in the EU since inflation has accelerated,
and since growth in jobs is also decelerating,
the UK is actually losing an estimated
£340 million a week because of the uncertainty created by Brexit,
and this is before the whole impact has even been felt.
So, the losses to the UK are substantial,
and we could predict these if we know the theory of free trade,
we know the depth of integration in the EU,
we could predict that the UK would lose by leaving.
At the same time,
existing EU countries will also lose,
because they also lose the efficiency that's gained by trade with the UK.
This map shows you different EU countries and how much they will
lose because of the exit of Britain from the EU,
and you can see Germany is the most affected after Ireland because of course,
their trade is most intense with the UK.
Gayle AllardProfessor
